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I am new here and I want to ask; Is it true that after-tax cost of capital is used for all NPV questions after deducting the tax rate?
I was looking at a lease & buy NPV question where I find out that the after-tax cost of borrowing is used not before-tax.
Thanks for the answer.
Please confirm that the after-tax borrowing rate is calculated by deduction tax rate from the borrowing rate such as: before-tax borrowing rate x (1 – tax)??
and where the tax rate is not available we will take the before-tax cost of borrowing?
Thanks again, I really appreciate your help 🙂
It depends whether the borrowing is redeemable or irredeemable.
With redeemable debt, the cost of debt is the IRR of the after tax flows.
If tax is not mentioned (which is unusual for the exam) then we assume there is no tax.
I do suggest that you watch my free lectures on the calculations of the cost of equity, cost of debt, and WACC. The lectures are a complete free course for Paper FM and cover everything needed to be able to pass the exam well.
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